Fitch says the ability to block redemptions will change corporate cash management.
The Securities and Exchange Commission’s final money fund reform rules, passed Wednesday, will “fundamentally change cash management for corporate treasurers,” according to rating firm Fitch.
The floating NAV isn’t the problem – although it has garnered the most attention. Rather, according to Fitch, the new rules allow money funds to impose liquidity fees and gates on institutional prime and municipal funds. Funds are now able to impose a liquidity fee of 2 percent on redemptions, and refuse to let investors get their money out at all, if a fund’s weekly liquidity falls below 30 percent of total assets.
In addition, the rules allow fund boards to impose liquidity fees and gates. Nongovernment money funds (including institutional prime and municipal) will be allowed to charge a liquidity fee of up to 2 percent on redemptions, and impose redemption gates, if a fund’s weekly liquidity falls below 30 percent of total assets.
Fitch notes, “Corporations rely on money funds to invest cash for routine business expenses like payroll, and the inability to access this cash if a gate is imposed raises operational concerns.”
Some analysts have predicted the rules will precipitate a shift from money funds into bank deposits or some other ultra-liquid cash management instrument. So far, that hasn’t happened but if it does, it could precipitate the redemption fees and gates that caused investors to run for the exits in the first place.